Credit Cards and the Economy: Pretty Good, Depending Upon Whom You Ask

With 3Q19 soon to close and the new decade on the horizon, the economy feels right, if you listen to top bankers. Bloomberg wonders if we are missing some cracks that should be considered leading indicators.

But there are signs that U.S. households are starting to feel stretched, possibly making it harder for them to continue propping up the economy.

The evidence is showing up on the debt side. Serious delinquencies on credit cards and auto debt have been creeping up in recent quarters.

That’s pushed some banks to set aside more money to cover bad loans and tighten lending standards for credit cards and other consumer loans.

The weakness is not in credit cards but rather some surrounding metrics.

Adding to the concerns was an unexpected drop in retail sales in September, the first declinein seven months.

While economists don’t see any serious problems yet, the numbers showed that consumers, who power some 70% of the U.S. economy, may be on shakier footing.

That’s a potentially worrisome sign when the manufacturing sector slipped into a recessionin the first half of the year, and businesses broadly are cutting back on investments.

“We’re in a more fragile situation where consumers are more skittish,” said Diane Swonk, chief economist at Grant Thornton in Chicago.

The good news is that many top banks perceive the potential risk and are being more conservative about loan loss reserves. Building loss reserves today is particularly important for those subject to Current Expected Credit Loss (CECL) calculations, more conservative accounting requirements than Adjustments for Loan and Lease Losses (ALLL).

Many banks are already reacting.

Even as JPMorgan Chase & Co. Chief Executive Officer Dimon was calling the consumer “quite strong” earlier this month, his bank increased the money it was setting aside for loan losses in its consumer and community banking division to $1.3 billion, from $980 million a year earlier. It did so even as the amount of loans in that unit’s books fell.

Discover Financial Services lifted loan loss provisions by 8%, saying consumers were “holding up well” but the company was being “disciplined and conservative and credit because it feels late cycle.“

American Express Co. also increased the amount it set aside for loan losses by 8% for the three months ended in September, because it had to write off slightly more bad loans, and more borrowers are falling behind on their obligations.

Oh, and those auto loans!

Across the U.S. in the three months that ended in June, auto loans that were 90 or more days late made up 4.6% of total balances, near the highest level since 2011. In credit card lending, 5.17% of loans turned seriously delinquent in that period, the fastest rate since 2012, according to Federal Reserve Bank of New York data.

Those rates remain well below levels seen during the financial crisis, but represent an uptick from earlier years in the recovery when banks were reluctant to lend to all but the most creditworthy borrowers.

Right now, the metrics are good. Best to make hay while the sun shines.

Overview by Brian Riley, Director, Credit Advisory Service at Mercator Advisory Group

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Credit Cards and the Economy: Pretty Good, Depending Upon Whom You Ask

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But there are signs that U.S. households are starting to feel stretched, possibly making it harder for them to continue propping up the economy. The evidence is showing up on the debt side. Serious delinquencies on credit cards and auto debt have been creeping up in recent quarters.